4 RoboCar Stocks Poised to Drive Much Higher

Mobileye (ticker:
MBLY
), whose chips and algorithms can use camera images to read road markings and signs and predict collisions, offers direct exposure. But the Jerusalem-based company's shares, which were priced at $25 in an initial public offering late last month and have since climbed to $40, could give value investors pause.

Instead, consider incumbents in the field of "advanced driver assistance systems," or ADAS, whose shares are more modestly priced. A new report from Robert W. Baird recommends buying shares of Gentex (
GNTX
), Delphi (
DLPH
) and Wabco (
WBC
), and keeping an eye on Autoliv (
ALV
).

First, some context: Humans are terrible at driving. Road crashes kill an estimated 1.2 million worldwide each year. And studies suggest an overwhelming majority of these are the result of driver errors that can be avoided with the help of technology. In developed markets, about 10% of cars have ADAS features, like lane departure warnings, collision prediction and parking assistance, but just about all cars should have them in a decade or so. One reason is that some such features lower insurance costs, making car buyers willing to pay up for them. Another is that, beginning next year, vehicles will need ADAS to secure top safety scores in the U.S. and Europe.

ADAS has been around for years. Google (
GOOG
) is famously testing a driverless car, and Tesla Motors (
TSLA
) says it wants to bring driverless technology to its electric cars. But streets filled with RoboCars are still many years away, right? Maybe not.

Mobileye plans to launch a feature that will allow for autonomous driving at highway speeds, a sort of hands-free cruise control, by 2016, with two car makers as partners. After that, the evolution to autonomous country driving, and eventually city driving, will require only minimal sensor improvements, along with major software advances.

For investors, then, ADAS offers near-term opportunities in assistive features, and longer-term opportunities as drivers cede more control to their cars. Mobileye, which has been in the business for 15 years, counts most major car makers as customers and has system-on-chip technology that keeps costs down by using ordinary cameras. But shares are ambitiously priced. Earnings per share aren't expected to top a buck until 2017, when they reach $1.15.

Mobileye's stock already goes for 35 times that figure. Wall Street is mostly positive on shares. The average price target is $45 and change, representing upside of about 14%. Dougherty & Co, which is bullish on Mobileye with a $45 target, predicts six million system sales per year on new vehicles by 2020, and $1.5 billion in yearly revenue, 75% gross margins and 30% operating margins.

Gentex Investors who aren't quite comfortable with futuristic stock prices may prefer the take of Baird, which recently initiated coverage of Mobileye with a Neutral rating, citing valuation. It highlights some industry veterans that are worth buying now. Its top pick, Gentex, has a dominant position in auto-dimming mirrors, which reduce glare during nighttime driving. It also uses cameras embedded in mirrors to automatically adjust high beams. New product versions offer collision warning, too. Shares sell for a reasonable 15 times this year's earnings forecast—and less than 13 times projected earnings two years from now, in 2016.

Wabco Wabco is Baird's top truck-related pick. It specializes in braking, stability and transmission systems for trucks, trailers and buses. Its collision warning systems can apply the brakes automatically if drivers fail to respond to threats. Such collision mitigation systems are already required for trucks in Europe. Wabco sells for more than 18 times this year's earnings estimate, but earnings are growing quickly. Shares fetch less than 13 times the 2016 forecast.

Delphi Delphi makes a broad range of vehicle components for fuel efficiency, infotainment, safety and more. Active safety products, including ones for collision prediction and lane departure warning, contribute less than 1% of sales. Even considering fast growth for the active safety portfolio, that admittedly gives investors limited exposure to the RoboCar shift. But shares look cheap at 14 times this year's earnings forecast and 10 times the 2016 number.

Autoliv Autoliv makes passive safety systems like seat belts and airbags and active ones like collision prediction and blind-spot detection. It will soon start reporting financial results in two different divisions, passive and electronic. That could get investors more interested in the stock. It goes for 17 times this year's earnings projection and 13 times the 2016 estimate. Baird notes that margins have been held down by investments in active safety systems and a production shift from Western to Eastern Europe. Those moves should begin to bear fruit next year.

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